High oil prices hitting US demand growth as supply remains strong

HOUSTON (ICIS)--High oil prices have set the US on the cusp of demand destruction for oil products, although supply and production are climbing, an analyst said on Tuesday.

The biggest driver in oil demand is the economy as there is a 6.5% growth in the former for every 1% of growth in gross domestic product (GDP), ConocoPhillips' chief economist, Marianne Kahn, said.

Demand can be measured as a percentage of the price of Brent crude oil to GDP. When that percentage falls to 4.5-5.0%, demand destruction begins, and the US is on that brink now, Kahn said.

The rate of US economic growth was slow throughout 2011, but 2012 is showing positive signs with a drop in unemployment claims filed, US equity markets rising and an improved housing market, the analyst said.

Demand growth has typically been 1m bbl/day, which slowed during the recession, picked up in 2010 and has since slipped, she said.

In addition, she said Europe's mild recession and its debt crisis are continuing issues as their effects are rippling into global banks and trade.

Globally, Kahn says there is a structural change causing demand growth as more of the world's population joins the middle class, as measured by GDP. She said the global middle class measures 2bn now and is expected to reach 5bn by 2030, mostly with growth in Asia.

She added that oil supply in the US continues to increase, along with exploration, with the number of oil rigs surpassing the number of gas rigs for the first time since the 1990s.

Goldman Sachs investment researcher Jeffrey Currie said the current oversupply of oil in the US has made fuels the country's largest export, surpassing Boeing products.

Globally, there has been below-average production in Syria, Libya, Sudan and Yemen, although Libya's production and exports have been increasing since its slowdown last year.

Long-term oil prices are driven primarily by supply and not demand, Currie said. Demand drives the one-to-two-year horizon, while supply drives the two-to-ten-year market, he said.

The long-term solution is to focus on supply, but one obstacle is access, Currie said. He said capital investments cannot chase the most profitable supply reserves and basins so they must chase the most accessible, such as offshore fields, a policy that is also more expensive.